A Binomial Tree Setting Has an Up-Move Of $u > 1$

question 13

Multiple Choice

A binomial tree setting has an up-move of $u > 1$ (with probability $p = 0.75$ ) and a down move of $d < 1$ (with probability $1 - p = 0.25$ ) ,with $u - 1 = 1 - d$ .The risk-free interest rate per time step is zero,so a dollar invested at the beginning of the period returns $R = \$ 1$ at the end of the period.The risk-neutral probability of an up-move in this setting

• A)Is \(> \frac { 1 } { 2 }\)
• )
• B)Is \(< \frac { 1 } { 2 }\)
• )
• C)Is equal to \(\frac { 1 } { 2 }\)
• )
• D)Is equal to \(p\)
• )

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